Fixing The Ponzi Problem

Bernie Madoff was an American money manager who was responsible for the largest Ponzi scheme in history. Madoff as a money manager claimed and reported constant steady and high returns of roughly 10-20% per annum from his split-strike conversion trading strategy. The split-strike strategy is a valid trading strategy in which the investor protects the risk of investments by purchasing out-of-the-money options. However, Madoff instead took the money of his investors and simply deposited it into a single account and only gave back money to those withdrawing based on the reported gains rather than investing in the strategy he claimed. Madoff began his fraudulent firm in 1991 but was not officially sentenced until 2008 when found guilty of cheating his clients out of $65 billion of their investments.

Madoff’s scandal and investigation brought the lapses of the Securities Exchange Commission (SEC) and the vulnerability of individual investors to light. After all, Madoff spent time on committees of the SEC and was even the chairman of the Nasdaq Market. Madoff was by no means trying to keep a low profile to avoid being caught; his firm became extremely large and well-known, all while simultaneously wiping out the life savings of millions of Americans. After the scheme broke and Madoff admitted to his crimes, a number of reforms were made internally at the SEC to ensure investors that another Madoff scheme would not happen again. In 2013, the SEC officially approved amendments to address the Madoff scheme, the first of which was “broker-dealers that carry customer assets must file with the Commission a compliance report stating that they are in compliance with certain of the financial responsibility rules. The report must also certify that the broker-dealer has effective internal controls to ensure compliance with those rules” (via SEC.gov).

This first amendment require all broker-dealers to file reports with the SEC regularly in order to ensure they are acting in accordance with their claims and reports to their clients. This was an extremely important amendment for the SEC to make because there were already similar filing requirements for investment advisors that were passed years prior to this amendment, but Madoff’s position as a “broker-dealer” allowed him to obtain and control all of his investors’ securities. The series of amendments also a series of “Audit Enhancements” that granted more access to the SEC or a Public Oversight Accounting Board that is examining a broker-dealer that has control over their customers’ securities.

As for the many investors who lost money to Madoff in his scheme, there was an established agency to help them. Known as the Securities Investor Protection Corporation, their purpose is to help protect the money of investors from being wrongly lost or stolen by a brokerage firm. Many victims turned to the SIPC when they began to realize that their money was gone, thanks to Madoff. However, the SIPC can only insure up to $500,000 per individual investor, which to people that had believed they were making millions and millions of dollars was very unsettling. The issue became more apparent when considering the nature of the Madoff scheme; investor that was told that their money had grown to a certain amount before the fraud was found believed they should be returned what Madoff said they had in their account with him; however, he never made any real profits for anyone, only took more money from someone else to give the appearance of profits to another.

To this day, there have been $14.17 billion dollars “recovered” for those victims through settlements, class-action lawsuits, and recovery agreements from those who returned some of the “profits” that Madoff had given them. The Madoff scandal has remained one of the most well-known and destructive cases of financial fraud in history, and the most alarming aspect of it was how he managed to do it for so long without being caught. The benefit of this is that the SEC and other examining agencies can now see the signs and have increased accessibility from this scandal, and the American people can recognize the importance of the SIPC and how vulnerable individual investors can be when it comes to their financial decisions.

WORKS CITED

“Bernard L. Madoff Investment Securities LLC Liquidation Proceeding.” The Madoff Recovery Initiative, www.madofftrustee.com/.

Hayes, Adam. “The Bernie Madoff Story.” Investopedia, Investopedia, 13 Sept. 2021, www.investopedia.com/terms/b/bernard-madoff.asp.

“The Securities and Exchange Commission: Post-Madoff Reforms.” The Securities and Exchange Commission Post-Madoff Reforms, www.sec.gov/spotlight/secpostmadoffreforms.htm.

“Strengthening Oversight of Broker-Dealers by Instituting a Framework to Prevent Another Madoff.” SEC Emblem, 31 July 2013, www.sec.gov/news/public-statement/2013-spch073113laa.